Water has long vexed investors. Statistics and news reports all confirm that many parts of the world face serious shortages of water that is suitable for human consumption and agriculture. Conservation measures, which would likely induce public panics if placed on gasoline, are being imposed on water supplies in the developing and developed world.

Demand for water technologies has increased in the face of the problem. Desalination expert Energy Recovery, meanwhile, pulled off one of the few successful green IPOs this year. Over 90 desalination projects have been announced in the last three years. Meanwhile, General Electric and Siemens have been actively buying water companies since 2004.

Nonetheless, investors, and particularly venture investors, only dedicate a fraction of the dollars to water. Most firms have yet to make a water bet. That old cant, "I'm just not finding many good companies," is often still heard (see Attention Water VCs: Start Booking Your Travel to Fresno).

Part of the problem lay in the customer base. Many companies, particularly desalination companies, sell to municipal water districts and government agencies, that then deliver it to millions of customers at a subsidized price who scream when rates are raised. These projects might result in millions in revenue, but move at a glacial pace.

If there is a unifying, underlying theme to VC investments, it is that the money is largely going to companies serving the private sector. A growing number of startups circumvent this problem by aiming their products at growers, retailers and agribusiness. These customers have shown a willingness to invest in new technologies if they can reduce costs or crop losses. Others cater to the deep pockets of the chemical industry and manufacturers. With the customer base in mind, purification, treatment and water management show the strongest prospects for promising investments.

But another problem has been taxonomy. Investors understand solar. If an executive at a solar conference says he has a III-V with a two-axis tracker, you can skip to the term sheet. At least half of audience understands. Water takes more explaining.

With that in mind, here is how we break down the water world for startups, along with a list of companies. (Part One of this article gives a rundown on water creation, or desalination. Part Two will deal with purification, the biggest segment of the market. Part Three will delve into management, treatment and monitoring.)

Water Creation

Water creation is also known as desalination. Technically, desalination companies do not make water. The earth pretty much has the same amount of water – 1.4 billion cubic kilometers – as it did a few billion years ago. Only about 0.75 percent of that, however, consists of readily accessible groundwater or freshwater, according to the World Water Council. The rest is frozen (2.25 percent) or salty (97 percent.). As a result, anyone who reclaims water from the seas is creating it in our book.

Most desalination companies are focused on bringing down the cost of reverse osmosis desalination, which now hovers around 50 cents per cubic meter, through membranes or other equipment that can do the job with less pressure and/or power. Desalination projects can run into the hundred million range, but they are generally funded by agencies.

Some interesting companies include:

NanoH2O, which grew out of a research project at UCLA, has raised $20 million in two rounds. It has a membrane embedded with nanoparticles that repels salts and lets water pass. By exploiting chemical attraction, NanoH2O reduces the amount of mechanical-induced pressure required for reverse osmosis: The company claims it can process 70 percent more water with 20 percent less power than conventional reverse osmosis plants.

At 16-years old, Energy Recovery isn't exactly a startup, but it's a relatively new name to U.S. investors. It sought funds from U.S. VCs earlier in the year, but went public instead. Think of it as the First Solar of desalination.

The company's ceramic PX Pressure Exchanger harvests the high pressure of waste created by brine streams during the desalination process and then uses the pressure to drive the reverse osmosis process. (The company's Power Model software also monitors pressure and energy consumption.) Energy Recovery has installed its pumps in over 300 plants and, by its own estimate, this equipment in the aggregate reduces power consumption in those locations by 300 megawatts. In 2007, revenue came to $35.4 million and net income came to $5.8 million, a big jump over the $20 million in revenue and 2.4 million in net income for 2006. In 2003, the company pulled in $4 million. In the first quarter of 2008, revenue came to $9.1 million and net income totaled $947,000. It recently signed deals to install equipment in Cyprus, Israel and China.

Quos is a highly secretive Chicago company founded by Chinbay Fan and funded by Khosla Ventures, Quos has applied for patents for a system that desalinates and purifies with graphite porous electrodes.

"The apparatus is capable of removing ionized and non-ionized organic compounds, inorganic ions, particulates and bacteria from wastewater streams in a single unit to produce potable water. Porous carbon-based electrodes function as impurities filters to remove particulate matter, such as ash, sand and high molecular weight compounds, as electrodes to concentrate and remove ionic species, and as adsorbents to remove organic materials and bacteria from the wastewater stream," says patent application 11/724534.

"Methods and systems described herein are capable of purifying most water streams requiring purification, including but not limited to industrial wastewater, gas and oil field wastewater, and coal mine wastewater, and is well-suited for desalination of salt water. ... The system is compact, energy efficient, and cost efficient to produce and operate," says the patent application.

Stonybrook Purification has created a thin, fibrous scaffold for reverse osmosis membranes that increases water flow to the reverse osmosis membrane. The company, out of SUNY Stony Brook, also has its own reverse osmosis membrane. Stonybrook raised $4.1 million last year. The challenge, says the company in its patent applications, is in coming up with materials that are hydrophilic but also insoluble.